BILL ANALYSIS Ó
AB 17
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Date of Hearing: April 13, 2015
ASSEMBLY COMMITTEE ON REVENUE AND TAXATION
Philip Ting, Chair
AB 17
(Bonilla) - As Introduced December 1, 2014
Majority vote. Fiscal committee. Tax levy.
SUBJECT: Personal income tax: credit: qualified tuition
program
SUMMARY: Provides a tax credit in the amount of 20% of the
monetary contributions made by a qualified taxpayer to a
qualified tuition program, not to exceed $500. Specifically,
this bill:
1)Provides, beginning on or after January 1, 2016, and before
January 1, 2021, a refundable tax credit, as specified,
against the "net tax" to a qualified taxpayer that contributes
money to one or more qualified tuition programs.
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2)Provides that the amount of the credit is the lesser of the
following:
a) 20% of the monetary contributions made by the qualified
taxpayer to a qualified tuition program that the qualified
taxpayer owns during the taxable year; or,
b) $500.
3)Provides that the portion of the credit that is in excess of
tax liability shall, upon an appropriation by the Legislature,
be paid to the qualifying taxpayer.
4)Defines a "qualified tuition program" in the same manner as a
qualified tuition program under Internal Revenue Code (IRC)
Section 529.
5)Defines a "qualified taxpayer" as an individual who, on behalf
of a beneficiary, contributes money to a qualified tuition
program for which the individual is the account owner and has
an adjusted gross income of either:
a) $100,000 or less if the qualified taxpayer files as
single, married filing separately, or registered partner
filing separately; or,
b) $200,000 or less if the qualified taxpayer files as head
of household, surviving spouse, married filing jointly, or
domestic partner filing jointly.
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6)Allows, in the case of married taxpayer or domestic partners
who file separate returns, the credit to be taken by either
spouse or registered domestic partner, or divided equally
between the spouses or registered domestic partners.
7)Defines "nonqualified withdrawal" as any payment or
distribution from a qualified tuition program that is subject
to additional tax as provided for by IRC Section 529(c)(6).
8)Provides that when a qualified taxpayer receives a
nonqualified withdrawal, in addition to any other tax, an
additional tax shall be imposed in an amount that is the
lesser of 10% of the nonqualified withdrawal or the total
amount of credits received for the taxable year and for all
prior taxable years that a qualified taxpayer was allowed a
credit pursuant to this bill.
9)Provides that the Franchise Tax Board (FTB) may proscribe
rules, guidelines, or procedures necessary or appropriate to
carry out the purpose of this section.
10)Takes effect immediately as a tax levy.
EXISTING LAW:
1)Provides tax-exempt status to qualified tuition programs.
Qualified tuition programs are programs established and
maintained by a state (or by an eligible education
institution) under which a person may purchase tuition credit
or make cash contributions to meet the qualified higher
education expenses of a designated beneficiary. Contributions
to a qualified tuition program cannot exceed the amount
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necessary to provide for the beneficiary's qualified higher
education expenses. Distributions to a beneficiary are
excluded from income. Contributions made to a qualified
tuition program are not deductible.
2)Conforms to IRC Section 529 as of the "specified date" of
January 1, 2009, with certain state modifications, including a
modification to the 10% tax on excess distributions to instead
be an additional tax of 2.5% for state purposes.
3)Provides its own IRC Section 529 qualified tuition program,
known as the Golden State Scholarshare Trust (ScholarShare).
ScholarShare enables taxpayers to save for college by putting
money in tax-advantaged investments. After-tax contributions
allow earnings to grow tax-deferred, and disbursements, when
used for tuition and other qualified expenses, are federal and
state tax-free. Distributions in excess of qualified higher
education expenses incurred for the beneficiary, the portion
of the excess that is treated as earnings generally is subject
to income tax and an additional 2.5% tax for state purposes.
4)Limits the total amount of contributions to a beneficiary to
$371,000. Accounts that have reached the limit may continue
to accrue earnings.
5)Applies performance measurement standards to any new tax
credit under either the Personal Income Tax (PIT) or
Corporation Tax (CT) Law if enacted by a bill introduced on or
after January 1, 2015. Specifically, existing law requires
the all of the following:
a) Specific goals, purposes, and objectives that the tax
credit will achieve:
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b) Detailed performance indicators for the Legislature to
use when measuring whether the tax credit meets the goals,
purposes, and objectives stated in the bill; and,
c) Data collection requirements to enable the Legislature
to determine whether the tax credit is meeting, failing to
meet, or exceeding those specific goals, purposes, and
objectives, including a requirement to specify both of the
following:
i) The baseline data, to be collected and remitted in
each year the credit is effective, for the Legislature to
measure the change in performance indicators; and,
ii) The taxpayers, state agencies, or other entities
required to collect and remit data.
FISCAL EFFECT: The FTB estimates General Fund revenue loss of
$44 million in fiscal year (FY) 2015-16, $90 million in FY
2016-17, and $100 million in FY 2017-18.
COMMENTS:
1)Authors' Statement : The author has provided the following
statement in support of this bill:
Children with college savings accounts are seven-times more
likely to attend college. AB 17 will increase the number
of families saving for college and also increase the amount
of money they set aside for higher education. California
is one of only six states with personal income taxes that
do not offer any type of tax incentives for savings with a
529 plan. Californians have nearly $100 billion in student
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debt. It is estimated that this bill will decrease student
debt by more than $700 million within 20 years. AB 17 will
stimulate economic activity by providing college graduates
with more disposable income to make major purchases such as
buying a home or automobile.
2)Arguments in Support : The Financial Services Institute states
that "[a]s educational expenses continue to rise, it becomes
increasingly important that families engage in long-term
planning and savings for their children's education. To help
in this endeavor, 529 savings plans have been established in
the Internal Revenue Code. This bill creates a modest tax
break to help make such important savings more affordable. By
creating this incentive, the State of California is clearly
sending the message that education is a priority and that it
values the importance of long-term planning for achieving
educational goals."
3)Conformity Issues : As noted above, California conforms to IRC
Section 529, with slight modifications. In general, state
conformity with federal law promotes greater simplicity and
eases administration of complex tax laws. The Federal
Government does not provide a credit for contributions to a
529 plan. By providing a refundable credit for contributions
made to qualified tuitions programs, this bill would bring
California out of conformity with federal law.
4)Favoring Higher Income Earners : According to a report by the
Government Accountability Office (GAO), less than 3% of
families have 529 or Coverdell plans and those who do tend to
be wealthier. (Higher Education: A Small Percentage of
Families Save in 529 Plans, GAO, Dec. 2012.) Specifically,
families with 529 and Coverdell plans had a median income of
$142,000 per year and a median financial asset value of about
$413,500. The report also stated that families with 529 plans
tend to have higher levels of education, which may increase
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the likelihood that their children will attend college.
The report outlined several reasons why low-income families
participate far less in 529 plans, such as a lack of
awareness, confusion as to how the plan works, and differences
among the various 529 plans. However, 68% of those surveyed
stated a lack of money as the major reason for not
participating. In the end, it is difficult to encourage
families to save for college when they have little or no
disposable income.
5)Low-Income Earners May Never See a Credit : This bill provides
that the portion of the credit that is in excess of tax
liability shall, upon an appropriation by the Legislature, be
paid to the qualified taxpayer. By providing a refundable
credit for contributions made to a qualified tuition program,
this provision may encourage low-income families to save for
college. However, this bill, as currently written, requires a
subsequent appropriation of funds by the Legislature, which
means certain taxpayers may not receive a credit despite
making contributions. Additionally, this bill is unclear as
to whether the appropriated funds would apply to a single
taxable year or to multiple years. The fact that the
refundability of the credit is not certain means that
low-income families are less likely to participate.
6)High Cost of a Formal Education : State support for higher
education has been dramatically reduced because of budget
crises over the last 10 years. According to a study by the
Public Policy Institute of California, in 2010-11, California
spent $1.6 billion less in higher education than it did 10
years earlier, adjusted for inflation. (Hans Johnson,
Defunding Higher Education: What are the Effects on College
Enrollment, Public Policy Institute of California, May 2012.)
The provisions of this bill are meant to counteract the
skyrocketing costs of an education by providing a credit for
contributions made to qualified tuition programs. Instead of
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forgoing General Fund revenues that predominantly favor higher
income earners, these funds may be better utilized if directly
appropriated to the state's University of California,
California State University, and Community College system.
7)Performance Measurement Standards : Existing law requires any
bill, introduced on or after January 1, 2015, that would
authorize a new credit under either the PIT Law or the CT Law
to provide performance measurement standards. According to
legislative findings and declarations, tax preferences
represent a major exercise of government power, but face less
oversight than the spending side of the budget. As a way of
ensuring transparency and accountability when investing public
dollars through tax credit programs, the Legislature decided
to apply performance measurement standards as a way of
reviewing tax credits with the same level of scrutiny as
spending programs. Unfortunately, this bill was introduced on
December 1, 2014, and is therefore not required to abide by
the standards under Revenue and Taxation Code (RTC) Section
41. However, in order to maintain the Legislature's intent of
providing oversight for new tax credit programs, the author
may wish to include performance measurement standards to this
bill.
8)Prior Legislation :
a) AB 1956 (Bonilla), of the 2013-14 Legislative Session,
would have provided a tax credit in the amount of 20% of
the monetary contributions made by a qualified taxpayer to
a qualified tuition program, not to exceed $500. AB 1956
was held on the Assembly Appropriations Committee's
Suspense File.
b) AB 675 (Gilmore), of the 2009-10 Legislation Session,
would have allowed a deduction for contributions made to a
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qualified tuition program. AB 675 was held in this
Committee.
REGISTERED SUPPORT / OPPOSITION:
Support
Treasurer, State of California (Sponsor)
California Association of Private School Organizations
California Catholic Charities
California Communities United Institute
Contra Costa County Office of Education
Early Edge California
Financial Services Institute
Greenlining Institute
National Association of Insurance and Financial Advisors -
California
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Parent Institute for Quality Education
Pleasanton Unified School District
President, John F. Kennedy University
Securities Industry and Financial Markets Association
State Farm Mutual Automobile Insurance Company's
United Way California Capital Region
Urban League of San Diego County
Opposition
California Tax Reform Association
Analysis Prepared by:Carlos Anguiano / REV. & TAX. / (916)
319-2098
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